Big changes to savings are afoot from next April. The new personal savings allowance launches, allowing all basic-rate taxpayers to earn £1,000 in interest tax-free (higher-rate £500) from all types of savings (for want of doubt this includes high interest bank accounts and top normal savings).
Yet how this impacts children has been something I’ve been struggling to get the Treasury to confirm, until now. So I want to bash out a quick explanation.
Do children pay tax?
There’s a common myth that children don’t pay tax. It’s not true. Children pay tax just like adults, and like adults, if their income is under £10,600 a year then no tax is taken. Yet as most children (Harry Potter stars excepted) don’t earn even close to that, their savings are usually tax free.
And if you fill out an HMRC R85 form for them (you won’t have to do this from next April), it’ll ensure the interest is paid tax-free.
Money given by parents is different though
Some of you may be thinking, "Great, I’ll save in my kid’s name so it’s not taxed", but sadly the tax man has thought of that. Children aged under 18 can only earn £100 total per tax year in interest from any money ever given to them from each parent or step parent. This equates at the top children’s savings rate as about £3,300 saved.
This rule only applies to parents and step parents – it doesn’t apply to guardians, grandparents, aunts, uncles, brothers or sisters – they can give as much as they like.
NB. If you’re thinking great, I’ll give my nephew money and my sister can give my kids the same back, if tracked down it’d likely be tax evasion so I wouldn’t bother.
What if they earn over £100 from parentally given money?
If your child earns more than £100 in interest, the whole lot is taxed at the parent’s rate – so if you’re a higher-rate taxpayer, they’ll pay the higher 40% rate on that too – even if their own income tax and personal savings allowance is untouched.
The only way around this is to give them money inside a Junior ISA, Child Trust Fund or NS&I childrens savings bond.
How will the new personal savings allowance affect this?
In a nutshell it won’t. If children and parents earn up to £10,600 a year from income and savings interest, the savings will be tax-free, plus they’ll have £1,000 tax-free in savings interest on top (there’s also the extra £5,000 savings allowance that’s already in effect for some lower earners that could take them to £15,600).
Yet if a child’s money given by a parent is generating over £100 interest, then it’ll count towards the parent’s allowance, not the child’s – so if the parent has gone over their £1,000 savings interest allowance (or higher-rate £500, or are top-rate taxpayers who don’t get the personal savings allowance) – this will be taxed that way.